Personal views from University of Bath researchers on the news of the day

Unpicking the Budget Challenges

  , ,

📥  Public Policy, Society

It was just a few months ago that the Government announced an unexpected improvement in their finances which facilitated a more benign environment with fewer cuts and the possibility of lower taxes. Now we are suddenly faced  with the reverse scenario with the Government needing to make savings, or increase taxes, to fill an unexpected black hole in their finances.

This sudden turnaround should emphasise just how difficult making economic policy is and how cautious we should be on any economic pronouncement with respect to either the future, or indeed the present. It is a hard task, but nonetheless one feels the Government should have done better and in particular been a little more cautious in the Autumn.

Measuring debt

The UK debt stubbornly resists falling as a proportion of GDP. In 2012 gross debt was 85.8% of GDP and by 2015, according to the IMF, it was 88.9%. In part this is because of a reluctance by the Government to raise taxes. In part too it is because the debt to GDP ratio is just that, a ratio. If GDP fails to grow by any amount then the ratio at best will only fall slowly. The emphasis by the Government in this budget will probably lie with further cuts in government spending, but an alternative would be to focus on growth.

In this week's Budget the Chancellor can be expected to focus on cutting government spending. It is difficult because so many areas are ring fenced and it seems likely that the cuts will focus on the welfare budget, hitting the least well off and most vulnerable. There is also likely to be an increase in so called stealth taxes, such as national insurance contributions. Given this, will the Government, as is rumoured, be able to make tax cuts for the higher earners by reducing the rate at which people begin to pay the higher rate of tax?

A surprise in store?

But I think too there will also be a surprise or two in store, something nobody expects, in part to divert attention from the harsh reality of further government cuts. One possibility is measures will be taken to reduce tax avoidance with the Government finally prepared to take this problem seriously, particularly as it applies to large multinationals. Another possibility, unlikely in the short term, but almost inevitable in the long term, is that the ring fenced areas will begin to come under substantial pressure.

Critical to real progress on the debt is a strongly growing economy. If, for example, it grows by 3%, then the debt can grow by 1% but still as a ratio to GDP it declines and quite rapidly. But the world economy is in a difficult state and given our dependence on this for exports, healthy and continuing growth seems a little distant.

Government cuts have real consequences for us all. Government cuts have impacted on local authorities. Bus services are being cut, the police are being cut, the health service although ring fenced is under pressure, road and other infrastructure building is constrained. Although for the South West, probably the biggest issue right now probably has little to do with the budget, but is rather the future of Hinckley Point.

For more on Professor John Hudson's research see http://www.bath.ac.uk/economics/staff/john-hudson/.

Leave a Reply

  • (will not be published)